US Economic Outlook 2008 - 2011

Randy S. Economicrot.blogspot.com

Agenda
Money Fed Reserve US Dollar Worlds Reserve Currency Inflation Debt Housing Bubble Current and Future Economic Outlook What to do

Money what is it?

Money is a good that acts as a unit of account, a store of value, and a medium of exchange

Bartering & Commodity Money

Before the development of Currency, people had to barter to obtain the goods and services they needed -- but bartering had its flaws Commodity money eventually replaced bartering for advancing economies Colonialists, for example, used beaver pelts and dried corn as currency for transactions. They were widely desired (and therefore valuable), but they were also durable, portable and easily stored.

Another example of commodity money was the U.S. currency before 1971, which was backed by gold.

Fiat Money

In a fiat money system, money is not backed by a physical commodity (i.e.: gold). Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it.
Nixon removed the US Dollar from the Gold standard in 1971 thus changing the US dollar from a Commodity money to a Fiat currency

In a fiat monetary system, there is no restraint on the amount of money that can be created. This allows unlimited credit creation Initially, rapid growth in the availability of credit (money) is often mistaken for economic growth, as spending and business profits grow and frequently there is a rapid growth in equity prices.
In the long run, however, the economy tends to suffer much more by the following contraction than it gained from the expansion in credit
This is where we are today

Federal Reserve Banking System

The Federal Reserve Act was railroaded through Congress at 4:30 am on Monday, December 22, 1913
Numerous members absent/sleeping & many who voted for the Act didnt really understand what they were voting for

President Woodrow Wilson, pressured by political/financial backers, signed Fed Reserve Act into law on Dec 23rd & stated:
We have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world -- no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men.

Federal Reserve Act transferred US money supply and banking system controls from Congress to a private banking elite
These private bankers could now create money from nothing, loan it to our Gvt. & charge interest (our federal income tax system) for privilege of doing so

Quotes on Federal Reserve Banking

"Give me control of a nation's money and I care not who makes the laws." Mayer Amschel Rothschild (1744 -1812) Godfather, Rothschild Banking Cartel Europe "Banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation than they have done or ever will do good." John Adams(1735-1826) Founding Father, 2nd US President If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, (i.e., the "business cycle") the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. Thomas Jefferson, US President 1801-1809 I believe that banking institutions are more dangerous to our liberties than standing armies. Thomas Jefferson,1816 "History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance." James Madison (1751-1836), Father of the Constitution, 4th US President It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." Henry Ford (1863-1947) Founder of Ford Motor Company

US Dollar Worlds Reserve Currency

British Pound Sterling was primary reserve currency 18th & 19th centuries The Bretton Woods Accord, Post World-War II, established US dollar as the newest world reserve currency
All currencies would trade in relationship to the US Dollar and the dollar would be tied to a gold standard at $35 oz. (dollar was said to be good as gold)

Major problems with gold standard in the 1960s

Foreigners demanded gold for payment of debt, rather than US dollars
Understood the US was printing far more money, to finance Vietnam conflict and fund new social programs, than was available in US owned gold reserves

A worried President Nixon abolished the Bretton Woods accord in August 1971
Dollar/Gold standard was removed US Dollar became a Fiat Currency Currencies around the globe went into turmoil; dollar lost value vs. gold in 1 yr Needed a new solution to reestablish faith and trust in the falling US Dollar

The US-Saudi Arabian Joint Commission on Economic Cooperation of 1974

Agreed that any country purchasing oil from OPEC had to pay in U.S. dollars
Oil importing countries now had to earn or borrow dollars to pay for their oil This 1974 act reestablished the dollar as the global monetary instrument and oil replaced gold as the basis for a strong dollar OPEC oil countries were soon overflowing with petrodollars and most of them ended up recycled through accounts in London and New York banks.

INFLATION what is it?

Wikipedia defines Inflation as: a rise in the general level of prices over time. It may also refer to a rise in the prices of a specific set of goods or services (e.g. energy, food, housing, etc). In any case, inflation is measured as a percentage in the rate of change of a price index. But that inflation definition (like most others you will find) is like putting the cart before the horse.

In Reality:
Inflation is caused by a net expansion of money supply that causes rising prices -- by devaluing a currency Stated differently: the expansion of a nations money supply increases available currency beyond the proportion of available goods and services causing more dollars to chase the same number of goods/services. Thus it creates a supply/demand situation that drives prices higher.

Growth of US Money Supply 1959-2005

$10 Trillion

Came off gold standard here

$700 Billion

Growth of US Fiat Money 2004 +

Yes, a 20% rate of growth!

Yes, $14 Trillion Dollars!

Fed is printing money at 20% annual rate; money supply to double in 4 years

INFLATION-1900-2000
2000 Dollar worth $.4 Cents compared to 1900 dollar Additionally, since 2000 the US Dollar has lost a further 60% vs. EURO Bottom Line: Todays dollar worth ~ 2 cents vs. 1900 Dollar

Actual Inflation Rate Today

Government States core inflation is 4%, but our wallets and bank accounts feel differently. Why? Because our wallets/accounts know better - Todays actual rate of inflation (as measured w/metrics abandoned in the 80s) is 12% and growing (recall inflation is caused by monetary growth)

By understating inflation, the US Gvt. pays its obligations (Social Security, Welfare, Pension Benefits, Military Pay/retirements, Medicare obligations, and even foreign held debt) with significantly devalued dollars over time

By understating Inflation US GDP is overstated

The Real figures say we are in Recession ** Negative Growth **

Gvts massaged figures say were not in recession

Total Credit Market Debt

2008 is ~ 400% - Debt ~ $53 tril - GDP ~ $13 tril

Came off gold standard here

Total US Debt Through 2007

Note that income hasnt kept up with Debt levels

US Personal Savings Rate

Housing Bubble

Some Housing Bubble Causes

Alan Greenspans easy money policies of the 90s created massive speculation and NASDAQ bubble
Maestro would cut rates and inflate at any sign of trouble:
US Stock Market Crash of 1987 Japans Economic Crash 1990 LTCM Hedge Fund Collapse 1994 Asian Currency Crisis 1997 Russian Bond Default 1998 Several other issues of the time

NASDAQ bubble popped/followed by 9/11 & recession

Trillions wiped out (fear for deflation/depression) Caused Alan Greenspan and the Government to Panic
Cut rates 13 times and held interest rates at 40 year low (1%) Printed/injected lots of new money into banking system
US consumers able to borrow money very cheaply

Housing Bubble Causes (cont.)

Mortgage Loan Securitization
Banks bundled/sold mortgage loans to investors (your retirement plan, hedge funds, other countries, etc)
Made quick money on both sides of the transaction Low risk they didnt own the loan

Significantly relaxed lending/underwriting standards

Bank didnt care if people couldnt qualify note to be sold Allowed more people qualify for homes they couldnt afford
Many qualified on teaser rate ARMs & stated income (no-qual) Banks even pushed pick-a-payment (exploding ARM) & NINJA loans

Appraisers encouraged to embellish home values

If house didnt appraise for requested amount appraiser blacklisted and never used again for future business

Supply/Demand imbalance
Lots of cheap new money chasing dwindling supply homes

History of Home Values

1890 benchmark factoring out inflation

US Mortgage Rate Reset Chart

Were here today (Note: 6-9 month lag to future foreclosures)

Exploding ARMs to be next wave; many were pick-yourpayment loans

Current/Future Outlook (1)

Credit/Debt bubble is popping; Housing market plummeting
Resets/Foreclosures & Inventory Increasing; wont subside till 2011+
(Extremely Deflationary in Nature)

Mortgage Securitization Market is FROZEN SOLID (cant sell)

Marked to Model Assets (CDO, MBS, SIVs, etc) losing value quickly
Default ratios much higher than Models anticipated Projected default levels prevents establishment of a price floor Auto/credit card defaults increasing this securitized debt is also failing (Extremely Deflationary in Nature)

Many Banks are Insolvent (Securitized, Tier-III, off balance sheet assets far surpass underlying Banking System Capital )
Banks unwilling to lend to each other; lending standards much tighter
Compounding the housing dilemma fewer buyers for larger inventory HELOCs being yanked back by the $ Billions

Auto loans and credit cards to follow suit

(Extremely Deflationary in Nature)

New credit will become very scarce in the future

Projected 45% cut in credit card credit lines by 2010

Current/Future Outlook (2)

Government and Federal Reserve are in a state of PANIC
Trying to fight the aforementioned Deflation with new Inflation Cutting rates, printing new money and injecting into banking systems
Over $1 Trillion in financial injections since Aug 07 (Highly Inflationary in Nature) Banks using this money to shore up balance sheets not as capital for new loans like the Fed wants

New unprecedented Federal Reserve lending mechanisms recently enabled to help shore up bank balance sheets
Trading toxic/securitized Tier-III garbage for Gvt. Treasuries
(Highly Inflationary in Nature)

Gvt.& Fed will eventually have to rescue bond, housing & various other markets via Taxpayer funded bailouts
Expect more stimulus checks to be cut for the masses
Money from Helicopters (Highly Inflationary in Nature)

Current/Future Outlook (3)

Growing worldwide demand for oil straining supply lines
Swiftly developing industrial economies like China and India taking a much larger oil market share than in years past World can extract and bring to market 87Mb Daily; using 86Mb Daily Many older whale oil fields are in a rapid state of decline Many new oil finds are small in scale and difficult/expensive to extract
New finds not keeping up with increasing global demand

IRAN no longer accepts Dollars for oil; opened their own oil Bourse Feb 08
Very negative for US Dollar and oil pricing

Vietnam, Qatar & Kuwait all recently de-pegged from US Dollar

With Dollar peg, they have to print money as fast as we do
Inflation is raging internal to their own domestic economies

OPEC threatening to de-peg and also to price oil in Euros

Currently demanding more Devalued Dollars for same tangible product
Increasing demand from China, India, etc, plus falling dollar are the reasons why we are now seeing $135 barrel oil

Huge negative implications for US Dollar and the future price of oil

Current/Future Outlook Bottom Line:

US cost of living to rise/standard of living to fall
The housing market will NOT recover soon (expect 2011+) Gvt and Fed are trying to fight Deflation with new Inflation
At 20% annual growth rate, expect Money Supply to double in 4 years
Expect dollars purchasing power to be halved (at least) during same period Inflation to increase significantly (food, energy, oil & imports more expensive)

Dollars status as Worlds reserve currency in serious jeopardy

Currently at lowest levels in history & potentially going much lower
If OPEC drops the Dollar Peg (likely) major dollar problems If oil is exchanged for Euros vs. dollar (possible) massive dollar problems If Asians and OPEC dump their $6 Tril in dollar reserves/bond holdings Expect a hyperinflationary blowout!

If Gvt/Fed are unsuccessful in reopening credit markets soon

Expect MAJOR recession w/potential for economic depression ~ 2011+

What to do?
Get out of debt Dont take on any new debt Stay conservative (volatile markets in future) Dont speculate (flipping houses, get rich quick, schemes, etc) Be thankful you have a job try to keep it!
Many layoffs coming in the not so distant future

Take a proactive role in your financial future Save money for potentially difficult times ahead If you can afford it, as a hedge against inflation and the devaluing dollar, buy some physical Gold and Silver for the rainy days & potentially years ahead!